In 2023, Affirm Holdings (AFRM) was the best-performing stock among companies with a market cap of over $5 billion, as shares of the buy-now, pay-later (BNPL) company rose 408% during the year - way ahead of the 24% returns that the S&P 500 Index ($SPX) delivered on the year.
However, 2024 has started on a negative note for Affirm stock. The shares are already down over 11% for the year, and are trading 17.5% below the 52-week highs hit in December.
Does it make sense to buy the dip in AFRM, or should investors still be on the sidelines? We’ll discuss this in this article.
Affirm Stock Is Quite Volatile
Affirm stock is quite volatile, and the 2023 rally was preceded by a 90% fall in the previous year. However, despite the share price outperformance last year, AFRM is still way below the all-time high of $168.52 set in November 2021.
The stock’s 2023 rally was driven by several factors, including an improvement in macro sentiments, which led to a rally in growth shares. Also, Affirm impressed markets with its financial performance - it posted an adjusted operating profit in the fiscal first quarter of 2024, ahead of projections. Importantly, the company managed to do so without compromising on credit quality.
Last year, Affirm expanded its partnership with Amazon (AMZN), and its solutions are now available on the company’s B2B (business-to-business) store. It also expanded the partnership with Walmart (WMT), under which Affirm’s BNPL solutions will be available at self-checkout kiosks at over 4,500 Walmart stores.
Analysts Are Bearish on Affirm Stock
Wall Street analysts are quite bearish on Affirm stock, and it has a consensus rating of “Hold.” Of the 18 analysts covering the BNPL stock, only 3 rate it as a “Strong Buy” and 9 as a “Hold.” Five analysts rate it as a “Strong Sell,” and 1 calls it a “Moderate Sell.”
Analysts’ pessimism is also reflected in the mean target price of $27.11, which is 38% below current prices. However, last month, Mizuho analyst Dan Dolev raised his target price on Affirm to a Street-high of $65, which is 46.5% above current prices.
The Long-Term Bullish Case for Affirm Stock
Dolev expects Affirm’s Gross Merchandise Volume (GMV) to rise to $55 billion by fiscal year 2026 in a “blue sky scenario,” which is ahead of the $50 billion medium-term goal set by the company. For context, Affirm is targeting a GMV in excess of $24.25 billion in fiscal year 2024.
The analyst also believes that Affirm will eventually transform into a “full-fledged financial services” company from being a BNPL firm. To be sure, Affirm has been working in this direction, and has launched products like Affirm Card and a high-yield savings account.
While Affirm has denied that it is planning to get into banking anytime soon, the company is working to increase its total addressable market (TAM). As part of the strategy, it is planning to expand internationally, beginning with the U.K. and then subsequently in the E.U.
The company also sees a major opportunity in the B2B space, and is currently focusing on the small and medium business financing market, which it estimates at $700 billion. It also intends to target the sole proprietorship market - which, again, is a big market, with over 28 million sole proprietorship firms in the U.S. alone. Affirm is also increasing its reach in the offline channel, where its share is currently minuscule.
The Key Risks for Affirm
While Affirm’s long-term outlook looks quite positive, it faces several risks, including growing competition in the BNPL space from the likes of Apple (AAPL) and PayPal (PYPL) which have much deeper pockets. Also, the rise in Affirm stock last year was partially due to expectations for a Fed pivot to rate cuts and a soft landing for the U.S. economy. If this macro thesis does not play out as expected, Affirm stock could come under pressure.
Finally, despite the recent sell-off, Affirm still trades at a next-12-month price-to-sales multiple of 6.2x. While the multiples have corrected from the December highs, they are still a bit high for comfort.
To sum it up, while I would continue to hold some Affirm shares for the long term, I won’t add any new shares yet unless the valuations drop to levels where the short-term risk-reward becomes more favorable.
On the date of publication, Mohit Oberoi had a position in: AFRM , AMZN , AAPL , PYPL . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
